Germany barely skirts recession in muted 4Q

By BLOOMBERG

FRANKFURT • Germany’s economy stagnated at the end of 2018, trailing most of its peers in the euroarea, and continued trade tensions mean any pickup in Europe’s powerhouse economy could be muted.

While the country narrowly avoided a recession, it fell to others to drive euro-area growth — which came in at 0.2% in the fourth quarter (4Q).

The Netherlands reported an expansion of 0.5% earlier yesterday, and Portugal saw output rise 0.4%.

European equity investors looked past the weaker than expected German growth data, as did euro traders.

The common currency was up 0.1% to 1.1274 at 12:29 Frankfurt time yesterday.

Economic signals at the start of 2019 haven’t been encouraging: Disappointing numbers keep rolling in and a slew of institutions have downgraded their outlooks.

Yet, a better 1Q might still be on the cards. Economists forecast growth of 0.4% for Germany and the euro-area as one-off inhibitors dissipate.

Still, the full-year outlook depends on whether stabilising trade and Chinese growth can revive industrial momentum.

Just last week, the European Commission issued sweeping downward revisions for Germany and many of the euro-area’s major economies.

The region faces a daunting combination of weaker demand for its exports, the prospect of a messy divorce with the UK and protracted impact from political tensions in Italy and France.

Germany’s economy was bolstered by domestic demand in 4Q. Investment, particularly into buildings but also equipment, rose markedly.

Government spending and private consumption rose, but there was no contribution from net trade.

According to economists at Bank of America Merrill Lynch, the current slowdown may prove temporary, but relies on “accidents not happening”.

That means a removal of US threats to hike car import tariffs, a Brexit deal and stabilisation of the Chinese economy.

Yet, business concerns this time are more entrenched than they were during the last growth scare, and that alone could weigh on investment.

A gauge for German manufacturing is signalling contraction, the Economy Ministry predicts the weak phase in industry will continue and Daimler AG is preparing a “comprehensive” cost-cutting programme.

At the European Central Bank (ECB), policymakers have signalled they won’t rush in with additional stimulus. Officials decided to halt bond buying in December and are waiting to see how to economy evolves before deciding to raise interest rates.

The domestic euro-area economy remains “pretty strong”, according to Irish central-bank governor Philip Lane, who is set to replace Peter Praet as ECB chief economist in June. — Bloomberg